AGENCY FOR INTERNATIONAL DEVELOPMENT PPC/CDIE/DI REPORT PROCESSING FORM ENTER INFORMATION ONLY IF NOT INCLUDED ON COVER OR TITLE PAGE OF DOCUMENT 1. Project/Subproject Number 2. Contract/Grant Number 3. Publication Date 497-0357 497-C-00-98-00045-00 January 2001 4. Document Title/Translated Title Indonesian Electronics Industry: Building International Competitiveness through Trade Policy Reform, IT- Based Inter-Firm Linkages and New Institutions 5. Author (s) 1. Idris F. Sulaiman 2. 3. 6. Contributing Organization (s) Nathan/Checchi Joint Venture/PEG Project 7. Pagination 8. Report Number 9. Sponsoring A.I.D. Office 127 PEG 140 ECG, USAID/Jakarta 10. Abstract (optional - 250 word limit) This report discusses the main issues and options facing Indonesian’s electronics industry in building its industrial competitiveness. The introduction provides an overview of the major issues. Section 2 outlines a survey of some of the key structural characteristics of the electronics industry is provided. Section 3 looks at some of the strengths of the electronics industry in Indonesia. Section 4 provides an overview of the immediate challenges for industrial survival. Sections 5 and 6 look in detail at the structural and organizational challenges facing the industry covering consumer and other electronics segments. Section 7, summarizes the findings and Section 8 outlines policy measures dealing with the industry-wide issues and the medium to long run measures directed at improving industry-specific and firm-level competitiveness that are essential if Indonesia is to become a successful player in the global electronics industry. 11. Subject Keywords (optional) 1. Indonesia 4. International Trade Policy 2. Electronics Industry 5. Competitiveness 3. Information Technology 6. 12. Supplementary Notes 13. Submitting Official 14. Telephone Number 15. Today’s Date C. Stuart Callison, Chief of Party 011-62-21-391-1971 17 Dec 2003 e-mail: [email protected] …...………………………………………….……………DO NOT write below this line…………………………………….…………… 16. DOCID 17. Document Disposition DOCRD [ ] INV [ ] DUPLICATE [ ] AID 590-7 (10/88) Partnership for Economic Growth - a joint project of the United States Agency for International Development (USAID) and the Government of Indonesia INDONESIAN ELECTRONICS INDUSTRY: BUILDING INTERNATIONAL COMPETITIVENESS THROUGH TRADE POLICY REFORM, IT-BASED INTER-FIRM LINKAGES AND NEW INSTITUTIONS by Idris F. Sulaiman* January 2001 *The views expressed in this report are those of the author and not necessarily those of USAID, the U.S. Government or the Government of Indonesia. For comments, please e-mail direct to: [email protected] 1 TABLE OF CONTENTS: NOTES, GLOSSARY OF ABBREVIATIONS………………………………………………………… 4 LIST OF TEXT TABLES AND FIGURES…………………………………………………………….. 6 EXECUTIVE SUMMARY……………………………………………………………………………… 7 (ENGLISH) (INDONESIAN) 1 INTRODUCTION.............................................................................................................................. 13 2 STRUCTURE OF THE INDONESIAN ELECTRONICS INDUSTRY.......................................... 15 2.1 Regional comparative broad output mix (consumer, components and industrial electronics).............................................................................................................................................. 15 2.2 Regional comparative specific key output mix...................................................................... 16 2.3 Production, Exports, Imports and Balance of Trade in Indonesian electronics ................ 16 2.4 Declining numbers of firms and workers in the electronics industry ................................. 19 2.5 Net domestic value-added and indirect taxes........................................................................ 19 2.6 Local sourcing, export performance and other firm characteristics .................................. 20 2.6.1 Domestic firms disproportionately bear the brunt of the Crisis................................ 20 2.6.2 Consumer electronics..................................................................................................... 21 2.6.3 Component and parts electronics ................................................................................. 21 2.6.4 Home appliances electronics ......................................................................................... 22 2.6.5 More ‘bulkier’ electronics products tend to have higher local sourcing................... 22 2.7 Impact of the East Asian Crisis.............................................................................................. 23 3 STRENGTHS..................................................................................................................................... 24 3.1 Large domestic market ........................................................................................................... 25 3.2 Low cost labour ....................................................................................................................... 25 3.3 Presence of foreign assemblers in the domestic market....................................................... 25 3.4 Proximity to Singapore and the large ASEAN market ........................................................ 26 4 IMMEDIATE CHALLENGES FOR INDUSTRIAL SURVIVAL................................................... 27 4.1 Parallel imports, ‘smuggling’ and under-invoicing.............................................................. 27 4.2 Indonesia’s comparatively disadvantageous export incentive schemes.............................. 32 4.3 AFTA ‘readiness’ and effective ‘liberalisation’ with parallel imports ............................... 33 4.4 Increased labour militancy and increased number of unions.............................................. 34 5 STRUCTURAL CHALLENGES....................................................................................................... 35 5.1 Underdeveloped domestic components and parts manufacturers ...................................... 35 5.1.1 Regional concentration without extensive local sourcing of components ................. 37 5.1.2 High but declining import dependence ........................................................................ 38 5.1.3 ‘Shallow’ industrial depth, low-value adding and limited range of products........... 40 5.1.4 Increased uncertainty due to changes in the trade, political and legal regime......... 42 6 ORGANIZATIONAL CHALLENGES.............................................................................................. 44 6.1 Electronics trade based on low value-added products ......................................................... 44 2 6.2 Weak capability for technological absorption and development ........................................ 46 6.3 Weak supporting technical institutions and support infrastructure................................... 49 6.3.1 Institute of Technology Bandung (ITB) ....................................................................... 49 6.3.2 State Enterprises (PT LEN Industri and PT INTI) .................................................... 50 6.3.3 Limited technical standards development ................................................................... 51 6.4 Weak human resource development...................................................................................... 52 6.5 Fragmented responsibility for industrial and investment promotion................................. 53 6.6 Lack of strategic marketing for promotion of exports......................................................... 54 6.7 Narrow focus of industrial association .................................................................................. 54 7 SUMMARY OF FINDINGS.............................................................................................................. 57 8 POLICIES TOWARD MANUFACTURING RENEWAL AND COMPETITIVENESS............... 59 8.1 Policies for renewal: industry-wide measures directly relevant to the electronics sector . 60 8.1.1 Twin problem of high ‘parallel’ imports and high effective protection rate ............ 61 8.1.2 Reform of Customs department, under-invoicing and product standards rules...... 62 8.1.3 Legal reform and the reduction corrupt business practices....................................... 64 8.1.4 Harmonising trade regime and incentives within ASEAN countries ........................ 65 8.1.5 Anti-dumping measures ................................................................................................ 67 8.1.6 Reduction of labour disputes and tackling industrial organisation issues................ 68 8.1.7 Expansion of domestic and international marketing.................................................. 69 8.2 Policies towards manufacturing competitiveness I: Industry-specific measures to strengthen inter-firm networks and improve technological infrastructure...................................... 72 8.2.1 Implementing a Proactive Strategy for Investor Relations........................................ 72 8.2.2 Simultaneous FDI and technology policy development .............................................. 73 8.2.3 Inter-firm Networking to Support Domestic Components SMEs ............................. 79 8.2.4 Physical infrastructure (which directly supports the components electronics industry) 88 8.2.5 Strengthening the industrial association...................................................................... 89 8.3 Towards manufacturing competitiveness II: firm-level measures to improve technological,